Tuesday, June 19, 2012

The Debt Jubilee That Gave Birth to Modern Germany

Albrecht Ritschl is professor of economic history at the London
School of Economics and a member of the advisory board to the German
ministry of economics.

OLD myths die hard, and the Marshall Plan is one of them. In the New York Times of June 12th German economist Hans-Werner Sinn invokes comparisons
with the Marshall Plan to defend Germany’s position against Eurobonds,
the pooling of sovereign debt within the euro zone. His worries are
understandable, but the historical analogy is mistaken, and the numbers
mean little. All this unnecessarily weakens his case.

Mr Sinn
argues against Germany’s detractors that Marshall Aid to postwar West
Germany was low compared to Germany’s recent assistance, debt
guarantees etc. to Greece. While Marshall Aid cumulatively amounted to
4% of West German GDP around 1950 (his figure of 2% is too low but that
doesn’t matter), recent German aid has exceeded 60% of Greece’s GDP,
and total European assistance to Greece is now above 200% of Greek GDP.
That makes the Marshall Plan look like a pittance. And it strips all
the calls for German gratitude in memory of the Marshall Plan off their
legitimacy. Or does it?

What Mr Sinn is invoking is just the
outer shell of the Marshall Plan, the sweetener that was added to make a
large political package containing bitter pills more palatable to the
public in Paris and London. The financial core of the Marshall Plan was
something much, bigger, an enormous sovereign debt relief programme.
Its main beneficiary was a state that did not even exist when the
Marshall Plan was started, and that was itself a creation of that plan:
West Germany.

At the end of World War II, Germany nominally owed
almost 40% of its 1938 GDP in short-term clearing debt to Europe. Not
entirely unlike the ECB’s Target-2 clearing mechanism, this system had
been set up at Germany’s central bank, the Reichsbank, as a mere
clearing device. But during World War II, almost all of Germany’s trade
deficits with Europe were financed through this system, just as most
of Southern Europe’s payments deficits towards Germany since 2008 have
been financed through Target-2. Incidentally, the amount now is the
same, fast approaching 40% of German GDP. Just the signs are reversed.
Bad karma, that, isn’t it.

Germany’s deficits during World War II
were mostly robbery at gunpoint, usually at heavily distorted exchange
rates. German internal wartime statistics suggest that when calculated
at more realistic rates, transfers from Europe on clearing account were
actually closer to 90% of Germany’s 1938 GDP. To this adds Germany’s
official public debt, which internal wartime statistics put at some 300%
of German 1938 GDP.

What happened to this debt after World War
II? Here is where the Marshall Plan comes in. Recipients of Marshall
Aid were (politely) asked to sign a waiver that made U.S. Marshall Aid a
first charge on Germany. No claims against Germany could be brought
unless the Germans had fully repaid Marshall Aid. This meant that by
1947, all foreign claims on Germany were blocked, including the 90% of
1938 GDP in wartime clearing debt....MORE